Inequality in the unconditional distribution of observed wage rates in the U.S. rose substan-
tially during the 1980s, mostly in the lower tail of the distribution. The causes of this rising
wage inequality are obscured by the fact that concurrent decreases in the federal minimum wage
tend to increase observed wage inequality, regardless of its effect on employment. This study
uses regional variation in the relative level of the federal minimum wage to separately identify
the impact of the minimum wage from nation-wide growth in “latent” wage dispersion during
the 1980s. CPS wage data show a tight empirical relation between the relative level of the
federal minimum wage and dispersion in the lower tail of the wage distribution, across states
and over time. After accounting for the diminishing impact of the minimum wage during the
1980s, the evidence points to little or no increase in wage dispersion in the lower tail of the
wage distribution.